Venezuela Bond Bull Says Sanctions May Keep Maduro Paying

(Bloomberg) -- One of the largest holders of Venezuelan bonds says U.S. sanctions are giving Nicolas Maduro’s government greater incentive to pay its debts.

The penalties imposed late last month restrict the country’s ability to restructure its obligations, meaning the president’s only option is to keep scraping up enough cash to keep current on overseas notes. Maduro will put off default as long as possible because it would be catastrophic for the oil industry and ultimately lead to a government collapse, according to Bent Lystbaek, who oversees $3.4 billion in emerging-market debt at Danske Capital.

“The willingness to pay is extremely high and now they have further impetus to keep the boat afloat,” Lystbaek said from Lyngby, Denmark. "Default would be the death sentence of Maduro’s administration."

Lystbaek isn’t alone in his thinking. While Venezuelan bond prices dropped in the days after sanctions were announced, they’ve since mostly recovered on the view that Maduro has tremendous incentive to keep investors happy if he wants to stay in office. While the U.S. crackdown led Fitch Ratings to cut the country deeper into junk territory, Venezuela’s default odds have actually dropped. The implied probability over the next 12 months declined to 61 percent from 65 percent a month ago, according to credit-default swaps data compiled by Bloomberg.

Danske Capital is the 19th-largest holder of Venezuelan bonds and 21st-largest holder of PDVSA debt as of June 30, according to data compiled by Bloomberg.

Venezuela’s benchmark dollar bonds due in 2027 rallied to a two-week high of 40.12 cents on the dollar as of 9:30 a.m. in New York.

Here’s what else Lystbaek had to say about Venezuelan politics and investment opportunities:

Why do you expect Venezuela to continue paying near-term?

  • “I don’t think Maduro could survive a default. It would be very, very hard to export oil. Oil cargoes could be seized. Import compression is already substantial and they couldn’t import anything then. Social unrest would increase dramatically and I think that would be the end game.”
  • “Now, they will turn to the Chinese and Russians to muddle through. I don’t think they even consider the alternative. The consequences of a default are devastating.”
  • That said, “I don’t think they have a long-term chance. The Chavistas are just living from one day to the next. It cannot go on forever and the end day is moving closer and closer.”

Which Venezuela bonds offer the best value now?

  • “We are confident that they will pay this year, and the long-end priced around 30 cents on the dollar will be okay in a default.”
  • Danske Capital’s largest overweight positions are in PDVSA bonds due in 2020 and 2026. The firm is market-weight on the long end of the Venezuelan curve.
    • “We feel very comfortable being in the PDVSA 2020s. There’s a very, very high likelihood that the first installment gets paid in October and we believe in the value of Citgo shares as collateral.”

How would a regime change impact bondholders?

  • “If there was a regime shift, the opposition would go for a restructuring and they could be successful and strike a deal. There’d be a radical shift in policy: they’d invite the IMF and it would all be very, very positive.”
  • “We could envisage a benign debt restructuring characterized by high recovery rates substantially above the levels where low coupon, longer-dated PDVSA bonds are trading today at 30 cents per dollar.”
    • “In the case of a default, there will be a relatively swift transition of power and a pretty swift debt restructuring along the lines of what we saw in Ukraine in 2015.”
  • Still, “there’s a risk that at a later stage when free elections have been held and the opposition regains power, they’ll say the loans weren’t legal and we annul all deals done with the Russians and Chinese.”